OECD side-by-side Pillar 2 deal: Relief for U.S. multinationals

On Jan. 5, 2026, the OECD Inclusive Framework released significant administrative guidance, dubbed the side-by-side package, intended to resolve long-running uncertainty over how the Pillar 2 Global Anti-Base Erosion (GloBE) rules will apply to U.S. multinational enterprise (MNE) groups. In line with an agreement reached between the U.S. and other G7 countries last summer, a new safe harbor will effectively deem the U.S. tax system compliant with Pillar 2 and exempt U.S. MNE groups from certain top-up taxes.

In addition to introducing the new side-by-side framework, the OECD package also extends the transitional country-by-country reporting (CbCR) safe harbor by one year and introduces a permanent simplified effective tax rate safe harbor, along with a new substance-based tax incentive safe harbor.

For U.S. MNE groups, the headline development is the new side-by-side (SbS) safe harbor, which limits the application of certain Pillar 2 taxes where the Inclusive Framework determines that the relevant domestic tax regime has similar policy objectives, overlapping scope and a complementary policy impact to the global minimum tax regime.

This framework is intended to exempt qualifying jurisdictions from the income inclusion rule (IIR) and undertaxed profits rule (UTPR) that could otherwise apply solely because the ultimate parent jurisdiction has not implemented the GloBE rules. Currently, the U.S. is the only jurisdiction listed in the OECD’s Central Record as having a qualified regime for purposes of the SbS safe harbor.

This is a meaningful and welcome development for U.S. MNE groups, as it materially reduces double-taxation risk and should significantly simplify ongoing compliance once effective. That said, the package does not eliminate Pillar 2 compliance for U.S. MNEs. The side-by-side package makes clear that qualified domestic minimum top-up taxes (QDMTTs) remain and GloBE information return (GIR) reporting obligations will continue even when the SbS safe harbor applies. 

Background: how we got here

Following the OECD/G20 Inclusive Framework’s Oct. 2021 agreement on a two-pillar solution and the subsequent design of the GloBE rules, many jurisdictions implemented Pillar 2 starting in 2024, with UTPR adoption occurring shortly thereafter. The U.S. originally agreed to the Pillar 2 framework but did not ultimately pass legislation implementing the GloBE rules, creating a structural tension.

However, the U.S. continues to operate a comprehensive international tax regime — including the net CFC tested income (NCTI) (previously global intangible low-taxed income, or GILTI), corporate alternative minimum tax (CAMT) and other related systems — that reflects similar policy objectives to Pillar 2, overlaps significantly in scope, and produce a complementary minimum tax outcome.

Pillar 2 was designed on the assumption that all jurisdictions would implement the framework. As a result, the Model Rules include the IIR and the UTPR designed to ensure that minimum taxes are collected when they are not imposed by the ultimate parent entity’s jurisdiction. Because the U.S. did not implement GloBE, those mechanisms applied to U.S. MNEs even though U.S. policymakers and particularly the Trump administration argued that the country’s tax rules were already achieving the same policy result. The result was duplicative taxation, inefficiencies, and increased compliance burden for U.S. MNE groups.

The package also reflects broader international policy negotiations during 2025, following growing concerns about how Pillar 2 could apply to U.S. MNE groups when it was clear that neither Congress nor the Trump administration would allow U.S. adoption of the GloBE rules. The new guidance is intended to deliver the outcome agreed to by the U.S. and the G7 in June 2025, which paired development of a side-by-side system with the removal of threatened U.S. retaliatory tax measures (namely a legislative proposal known as Section 899).

Against that backdrop, the side-by-side package represents the OECD’s practical roadmap for how the global minimum tax will operate for U.S. MNE groups going forward, including how the GloBE system is intended to coexist with the U.S. federal income tax system, while maintaining the OECD’s stated focus on ensuring guardrails against low-tax outcomes. 

Separately, the package arrives at a time when UTPR regimes are coming online across a number of jurisdictions and various transitional simplifications (including the UTPR safe harbor) are approaching their original sunset dates. Importantly, the Inclusive Framework has signaled the potential for such a side-by-side workstream for several years — including in the Pillar 2 Blueprint and the July 2021 two-pillar statement — noting that agreement would be needed on the conditions under which the U.S. regime would co-exist with the GloBE rules to ensure a level playing field.

More recently, the February 2023 Administrative Guidance operationalized parts of that agenda by confirming that GILTI is treated as a blended CFC tax regime and providing a time-limited simplified allocation approach, with the longer-term treatment to be assessed by the Inclusive Framework. The side-by-side package builds on that trajectory by (i) extending transitional relief, (ii) introducing a permanent safe harbor and (iii) providing an SbS system intended to remove IIR/UTPR-driven double-taxation outcomes for U.S. MNE groups.

Key developments in the side-by-side package

Side-by-side safe harbor (new, effective FY2026)

The SbS safe harbor allows MNE groups headquartered in qualifying jurisdictions to treat top-up tax as deemed zero for IIR and UTPR purposes, across both domestic and foreign operations, if the group satisfies specified eligibility criteria and makes a valid election. The safe harbor is effective for fiscal years beginning on or after Jan. 1, 2026.

At a high level, a jurisdiction can be listed as having a qualified SbS regime only if it (i) has both an eligible domestic tax system and an eligible worldwide tax system, (ii) provides a foreign tax credit for QDMTTs on the same terms as any other creditable covered tax and (iii) enacted the relevant systems before Jan. 1, 2026 (or a later date following OECD procedures).

More broadly, the Inclusive Framework’s assessment is intended to evaluate whether the jurisdiction’s tax regimes, taken together, are expected to effectively achieve a minimum level of taxation on an MNE group’s domestic and foreign operations (consistent with Pillar 2 policy objectives).

While the U.S. is the only jurisdiction currently identified as meeting the qualifying conditions, the Inclusive Framework has indicated that other jurisdictions may seek SbS treatment by requesting an assessment against the eligibility criteria. The Inclusive Framework will consider such requests as the SbS system evolves, including through assessments planned for eligible regimes and future review points.

Why this matters in practice (illustrative examples)

• With SbS: For a U.S. MNE group with intermediate holding companies and a mix of implementing and non-implementing jurisdictions, implementing jurisdictions may apply Pillar 2 backstops under the standard rules. In the structure illustrated, the UK and Ireland would apply QDMTTs locally, the UK could apply IIR outcomes to low-taxed profits in non-implementing subsidiaries, and implementing jurisdictions could apply UTPR outcomes to low-taxed profits in non-implementing jurisdictions (such as Cayman), depending on local law and the relevant safe harbors.
  
• Without SbS: Once the SbS safe harbor applies to the U.S. MNE group, top-up tax is deemed to be zero for IIR and UTPR purposes (subject to the safe harbor conditions), which should remove these subsidiary level IIR/UTPR outcomes that would otherwise arise solely due to the U.S.’s status as a non-implementing jurisdiction. In the illustrated structure, the primary residual Pillar 2 impact is expected to be through QDMTTs in adopting jurisdictions (for example, the UK and Ireland), alongside ongoing GIR and local reporting.

The SbS Safe Harbor is elective. The “Without SbS Election” panel illustrates the baseline application of the rules assuming the UTPR Safe Harbor applies (i.e., no UTPR exposure associated with the U.S. parent jurisdiction), but without an SbS election. The “With SbS Election” panel illustrates the expected outcome if the U.S. MNE group makes a valid SbS election and the safe harbor applies.

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UPE safe harbor (new, effective FY2026)

The package introduces a separate ultimate parent entity (UPE) safe harbor intended to apply (by election) for fiscal years beginning on or after Jan. 1, 2026. This safe harbor is designed to prevent the UTPR from applying to profits located in the UPE jurisdiction, provided that jurisdiction has a qualified UPE regime.

While both the UPE and SbS safe harbors are based on Inclusive Framework determinations recorded in the OECD Central Record, the UPE safe harbor is a separate relief mechanism with its own eligibility conditions and is not dependent on a jurisdiction qualifying for SbS treatment.

At a high level, the UPE safe harbor is expected to be available only where the Inclusive Framework has determined that the UPE jurisdiction has an “eligible domestic tax regime” that effectively achieves a minimum level of taxation on domestic profits (and therefore meets the eligibility criteria for a qualified UPE regime). The Inclusive Framework is expected to review jurisdictions and designate those that operate a qualified UPE regime by including them in a central record, but that list has not yet been issued.

Extended transitional CbCR safe harbor

The transitional CbCR safe harbor is a temporary simplification that allows a group to treat a jurisdiction’s Pillar 2 top-up tax as zero for a year if that jurisdiction meets one of three tests using CbCR data: the de minimis test, simplified effective tax rate “ETR” test or routine profits test. It is intended to reduce the need for full GloBE calculations during the early years of implementation while taxpayers build data, systems and controls.

The new guidance package extends the existing transitional CbCR safe harbor by one year. For calendar-year groups, this generally preserves the safe harbor through FY2027 (originally FY2026), with the simplified ETR test rate remaining at 17% for the extension year.

Permanent simplified ETR safe harbor

The package introduces a new permanent simplified ETR safe harbor intended to provide an administrable simplification beyond the transition window. At a high level, if a tested jurisdiction qualifies for this safe harbor, the top-up tax for that jurisdiction is deemed zero for the year.

Qualification is generally based on one of two simplified outcomes:

• A simplified ETR at or above the minimum rate (15%)
• A simplified loss outcome

The simplified ETR safe harbor is generally intended to apply to fiscal years beginning on or after Jan. 1, 2027, with the package also contemplating specified circumstances where availability may be brought forward to FY2026.

Mechanically, the simplified ETR is computed using income and taxes drawn from the MNE group’s Consolidated Financial Statement reporting packages, with “minimal adjustments” required under the safe harbor framework. The OECD’s SbS package includes the diagram below, which provides a high-level overview of the simplified ETR safe harbor calculation and the key categories of adjustments to simplified income and simplified taxes.

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Those adjustments are intended to make the simplified computation directionally consistent with GloBE rules (including, for example, specified adjustments to simplified income/taxes and certain cross-border allocation mechanics), while still avoiding the full complexity of a complete jurisdictional GloBE computation.  

The simplified ETR safe harbor framework also includes simplified approaches relevant for permanent establishments and flow-through entities (including elective approaches to simplify how certain permanent establishment income and taxes are reflected at the main entity level), as well as eligibility restrictions and continuity/re-entry concepts intended to reduce complexity where groups move in and out of the safe harbor from year to year.

Substance-based tax incentive safe harbor

The SbS package introduces an elective substance-based tax incentive safe harbor that can reduce (and in some cases eliminate) top-up tax attributable to certain qualified tax incentives in a tested jurisdiction. Where the filing constituent entity makes the election, the mechanism operates by increasing adjusted covered taxes in the jurisdiction by an amount equal to the lower of: (i) the qualified tax incentives used in the year or (ii) the jurisdiction’s substance cap — with the effect that the portion of top-up tax corresponding to those incentives is treated as zero (subject to the safe harbor’s conditions).

Qualified tax incentives are generally those available on a broad basis and calculated based on expenditures incurred or the amount of tangible property produced in the jurisdiction. The concept also can encompass certain credits (including qualified refundable tax credits or marketable transferable tax credits) where the group makes an annual election and the credit meets the expenditure-/production-based criteria. It excludes items that are not designed as qualifying tax incentives under the framework, such as non-tax subsidies or incentives that reduce non-covered taxes.

The effect of the substance cap is to anchor the benefit to real in-country activity. It is generally computed by reference to eligible payroll costs and/or depreciation (or depletion) on eligible tangible assets, and the rules also contemplate an alternative elective cap based on a percentage of the carrying value of eligible tangible assets (with specified exclusions for non-depreciable property such as land). The safe harbor is intended to apply for fiscal years beginning on or after Jan. 1, 2026.

Next steps

The SbS package will eliminate the risk of downstream IIR and UTPR exposure for U.S. MNE groups, once effective, which should meaningfully simplify future Pillar 2 compliance. However, the guidance reinforces that QDMTT and GIR reporting remain central features of the regime for U.S. MNE groups, even after the SbS safe harbor has been implemented. It also makes clear that FY2024 and FY2025 remain subject to the original framework. As a result, U.S. groups should continue readiness efforts for near-term compliance requirements.

U.S. MNE groups should prioritize FY2024 compliance readiness for the first GIR filing cycle (for calendar-year groups, generally due by June 30, 2026), including a clear documentation strategy, data readiness and controls — particularly in jurisdictions where the transitional CbCR safe harbor does not apply. In parallel, groups should maintain a “pre-SbS” UTPR readiness workstream for FY2025 exposures in foreign implementing jurisdictions, including modelling where UTPR could apply under local law and aligning data collection with those jurisdictions’ compliance calendars.